Productivity and the Productivity Commission (updated)

For well over a decade, I’ve been debating the claim made by the Productivity Commission that Australia experienced a productivity surge in the 1990s. My claim has been that the apparent high rate of productivity growth in the mid-1990s was the result of measurement error, most importantly the failure to take account of the increase in the pace and intensity of work that was apparent to everyone (except PC economists) at that time. This view led me to conclude that the supposed productivity gains would dissipate as more normal labor market conditions returned, which was exactly what happened.

In most of these debates, one of my chief antagonists was Dean Parham, who worked for the PC at the time, and is now a Guest Researcher there. Today I heard that Parham had written a new paper on the weak productivity growth of the 2000s. So, I was keen to see what response he would have to my latest work and to my arguments about work intensity. The answer, quite literally is “Nothing”. I have, it appears become an un-person at the PC. Parham doesn’t cite any of my work and, more importantly, fails to mention work intensity at all.

Update The original version of the post contained a somewhat snarky suggestion that Parham had been negligent in ignoring my work. He has written to me to say that this is incorrect. The reason he doesn’t mention it is because, in his view, nothing I have written on this topic, at least since 2004, merits a response.

Further update Dean Parham writes that

the reason I did not mention your work or the work intensity thesis in my paper is that I did not consider it central to the focus of the paper (industry contributions) or even to the contextual motivation of the paper.

Since the contextual motivation of the paper is (as the title suggests) the slump in productivity, I can’t see that this differs from my summary. If Parham thinks my work merits a response, he’s welcome to provide that response here or in any other venue that suits him.

I’ve got some urgent commitments over the next few days, so I won’t be able to return to this topic until later. But in the meantime, here are some of the things I’ve written about this in the last few years. Agree or disagree, I think I’ve put forward a serious case that deserves an answer.

72 thoughts on “Productivity and the Productivity Commission (updated)

  1. I think that there are two elements to this subject that neither JQ nor Parnham have any perception of.

    One is the massive resturing of manufacturing built on dramtic improvements in Computer Numerically Controlled machinery along with many game changing technology components of these machines. Coupled with this is the dramatic uptake of PC (personal computers) in the 90’s. The consequence of these advances was a massive improvement in manufacturing productivity in the 90’s, as well as office productivity due to the PC’s.

    The other element is “apparent productivity” due to Asian imports. Many will assume that it is the Chinese economy that benefits most from Asian manufactured imports. Not so. For most Asian origin goods bought through the 90’s the cost of those goods was around 10% of the Australian (and American) retail price. The other 90% circulated within the economy driving a shift from local manufacture to an inflated survice sector, and fed a steady program of construction industry and real estate overpricing. This caused a bubble of “productivity” in the 90’s which steadily dissipated in the 2000’s as technologically more savey second generation Chinese businessmen took over from their parents within China and Taiwan increasing the profit content of goods sourced out of Asia. This shift served to squeeze out many of the smaller importers in favour of the corporate sector who are still able to profit heavily within China due to their ability to control the manufacturers of their goods there.

    It is this very flow that is the basis of Europe’s crisis in the GIPSI countries as well.

  2. Is the payment of an efficiency wage to exert more effort – work with a greater intensity – inefficient?

    the efficiency wage hypothesis argues that managers to pay their employees more than the market-clearing wage to increase their productivity. This increased labor productivity pays for the higher wages.

    Both parties to employment contract have some discretion, but due to monitoring problems, it is the employee which can have the most discretion.

    Lazear demonstrates the use of seniority wages to solve the incentive problem. Workers are paid less than their marginal productivity, but earnings increase until they exceed marginal productivity.

    The upward tilt in the age-earnings profile provides the incentive to avoid shirking, and the present value of wages can fall to the market-clearing level, eliminating any unemployment.


    both sides of the employment contracts spend a lot of time on ensuring that the promised level of work effort and quality is actually delivered. Less shirking, less work-place theft and less need to monitor employees can be a welfare gain.

  3. You’ve also got to take into account the drought of the 2000’s, rising oil prices with in the 2000’s, the GFC, and the increasing toll of Climate related disasters. All of these have taken an unprecedented toll on the Australian economy, and productivity in various sectors.

    The main positive in the midst of this change is the mining “boom”. It would be an interesting exercise to remove the resources sector from the calculation and see how the Australian economy faired without it, to put Aus on an equal footing with NZ for comparison.

  4. @Ernestine Gross

    This is mischief:

    No matter how often the ‘fried egg production’ and the ‘weeded garden’ productions are repeated and no matter how large the quantities (as long as they are finite) of these productions grow, inputs preceed outputs in real time.

    when the original topic was:

    Output growth (from some cause, any cause) creates income growth, some of which can be used to finance growth by re-investment.

    Money revenues (or finance) is the feedback – not the physical output- (eggs or weeded gardens does not matter).

    Banner-waving claims to have “robust concepts” does not impress particularly as you have not defined either ‘production’ or ‘productivity’.

  5. Chris Warren, you are confused.

    Productivity is a technically well defined concept which refers to the quantities of inputs used to produce a given quantity of output. One speaks of an increase in productivity if either a given quantity of output can be produced with a smaller quantity of at least on input or, for given quantities of inputs, the quantity of output is increased.

    Revenue from the sale of output does not necessarily provide ‘finance’ (money) to buy more inputs. It is only if revenue exceeds expenses (profit) that these monies can be used to buy inputs for the next period (ie use profits instead of external finance). This surely is elementary. Unfortunately, much of macro-economics uses the term ‘output’ to refer to market values of transactions.

  6. @Ernestine Gross

    What does having “a technically well defined concept” which refers to X or Y or anything, actually represent. This is just replacing one missing concept of another sloppy concept.

    Productivity is a political concept and is a plaything of all manner of interests. A reasonable definition is the ABS, at:

    Here you will get something demonstrably different to “quantities of input to produce a quantity of output”.

    In fact it would appear to be those who claim productivity is necessarily “quantities” based are the real confused. A simple example will suffice:

    If 10 hours produce a commodity quantity of X which sells for $10 then this establishes a certain productivity.

    Now if the same quantities of labour and commodity X are produced – but it sells for $20, then productivity has changed – quantities remain unchanged.

    If profits are the revenues then still (as I stated):

    Money revenues (or finance) is the feedback

    There is no confusion.

  7. Money to do anything can come from a myriad of places.Therefore, lack of a profit need not constrain buying inputs or investment. Productivity is not easy to measure, especially in aggregate.

  8. Maybe the Productivity Commission should use its guest worker program to import some cheap academic labour with the requisite skills as Jim Rose seemed to suggest.

  9. @Chris Warren

    Thank you for providing the link to (the well known) ABS website on the national accounting framework. By doing so, you confirm what I have said, namely “Unfortunately, much of macro-economics uses the term ‘output’ to refer to market values of transactions.”

    In contrast to you, the ABS (as well as JQ) is quite candit about the difficulties in arriving at a meaningful ‘productivity measure’ using the the product of quantities and prices (and the aggregation across all reporting enterprises and having taxation and a financial sector and a foreign sector). The ABS talks about ‘experimental productivity measures’. They are professionals. The following quotes convey a bit of the problem:

    “{From the perspective of productivity measurement, the choice of valuation should reflect the price that is most relevant for the producer’s decision making; regarding both inputs and outputs. Therefore, it is suggested that output measures are best valued at basic prices (OECD 2001, p. 77).}

    “This method change has tended to moderate the productivity slowdown, as real output measures valued at basic prices grow slightly stronger than real output measures valued at purchasers’ prices (ie net taxes on products has been declining as a share of GDP).”

    You can also search for further examples of the ABS being fully aware that these national accounts based (experimental) productivity measures are a hotch potch (eg index problems and the distinction between a technologically induced change in productivity and economies of scale is lost and much more).

    You often carry on about ‘the capitalist system’ and that it is wrong. So, I am really surprised that your notion of ‘productivity’ is in money price terms, namely:

    “If 10 hours produce a commodity quantity of X which sells for $10 then this establishes a certain productivity.

    Now if the same quantities of labour and commodity X are produced – but it sells for $20, then productivity has changed – quantities remain unchanged.” [Chris Warren, @7, p2 above]

    My points (plural by now) stand.

    Prof Q has foreshadowed a more extensive piece on work intensity and welfare. Non-dictarorial mainstream economists are still concerned with the welfare of people and not with international comparisons of potentially useless indices. Maybe these indices could be given a different name – national accounting value throughput measures or something like this.

  10. @Ernestine Gross

    Thanks for all that additional, but how does this address your claim of “confused”?

    Productvity can be measurable in money terms, provided money retains its value. Under markety socialism this would apply. Under capitalism it cannot.

    There is no reason why productivity should not be a market concept, because you only find out the real (socially necessary) value of a commodity when it is exchanged in a regime of fair competition.

    I feel sorry for the ABS – but, as with their earlier and forlorn Composite Indicator, and now with productivity, they are at least exposing the hidden innanities of the capitalist accounting system.

    Markets, money, concepts are not the problem, nor do they constitute confusion by themselves. The real confusion only comes when you try to run any economy based on capitalist money and capitalist markets. This always trends to a GFC even despite Keynesian Canute-like attempts to resist the inevitable.

    Maybe you should go back and identify exactly what was the point of confusion you were seeking to decry, and with what evidence.

  11. @Chris Warren

    And what is the mischief in stating that production (which results in consumables) takes time such that output growth cannot proceed input growth? (Monetary illusions are not constrained by physical feasibility constraints.) Isn’t that one way to expose some problems with the work under discussion?

  12. @Ernestine Gross

    Obviously if this construction is intended to deny the feedback loop cited earlier. In this case it is high mischief.

    However in a vanilla context, even school-children will agree: production takes time, output growth cannot precede input growth and monetary illusions are not constrained by physical constraints.

    However at a more sophisticated level, things are reversed. If an economy has constant labour input paid at value, then there can never be worries over productivity.

    If in year 1 – workers are paid $100 for making furniture which sells for $100 and then in year 2 – the same workers improve skills and make more furniture which sells for $200 there is no increase in productivity or changes in unit labour costs, provided workers get fair wage increases.

    Year 1 – productivity – outputinput = $100 sales$100 wages
    Year 2 – productivity – ” ” $200 sales$200 wages.

    You can only get an increase in productivity if inputs become cheaper relative to outputs. In other words if exploitation increases.

    So there is no necessary improvement in productivity going from black and white TV’s to colour plasmas, provided all necessary workers have constant wage justice.

    Productivity growth and all the attendant concepts are capitalist political dogmas. Without capitalism, you can have dramatic increases in utilitywithout any change in money, wages, ewxploitation or productivity.

  13. is the increase in work intensity an example of a reduction in employee shirking or is it an example of post-contractual opportunism by employers or was it a bit of both?

    did the new labour laws reforms reduce shirking or did they increase post-contractual opportunism and monopsony?

  14. @Chris Warren

    How about you search for your feedback loop. Using material for furniture production is an input too. Let me know how you get on selling furniture produced with ‘labour’ alone. I surely wouldn’t buy from your prospectus.

    If you wish to see everything as ‘capitalist politicl dogma’ then this is fine with me. In the meantime I am quite content with the subject matter of this thread.

  15. @Ernestine Gross

    The feedback loop is well known M – C – M’. with the M’ becoming the new M (money) in the subsequent circulation. C is labour plus means of production.

    If you do not buy furniture that is produced by labour then you will have to spend your life sitting and eating on the floor.

  16. The article by Tim Jackson, Professor of Sustainable Development, in today’s NYT seems to me to be spot on regarding contemporary economic thinking.

  17. @Ernestine Gross

    Jackson also argues that, in general terms there’s a likelihood that the new economy is going to be ‘less capitalistic’. But he misunderstands capitalism as ‘ownership in private hands’ so for him the panacea is more vital involvement by the state and more public ownership including ‘distributed’ and employee ownerships (pg 89 and 200f).

    Maybe a useful starting point, but the real problem is capitalism itself, not private ownership. Privatisation is only the platform for capitalism. Private property pre-existed capitalism.

  18. @BilB

    This text is a confusing 136 page re-working of his earlier version of his 264 page earlier “Prosperity without growth”.

    He has therefore issued two quite different books with the same title. The 136 page version even has different chapters – originally twelve, now 11 in this pdf version.

    I hope it is obvious that my references to pages 89 and 200 (above) do not relate to this undated pdf version, but to the original 2009 publication.

    In his pdf, Jackson now describes his text as a ‘thinkpiece’. It is very useful in this context.

  19. A comment on productivity progress in the resources sector.

    Resources industry standard productive equipment early 1900’s

    Resources industry standard productive equipmet early early 2000’s

    Where does productivity go from here? Answer….no workers at all.

    Where to go from there? No executives at all.

    Leaving just the mega billionaire.

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